5 Things To Ponder: Sell In May & Go Away

There is an old Wall Street axiom that goes "Sell in May and go away, come again after St. Leger's day." Of course, as with all Wall Street axioms, they are viewed by the media to be "valid" only if they work every single year. The reality is that no axiom, investment discipline or strategy works all the time. It is the cumulative effect over long periods of time which defines success or failure.

In order to provide some context to today's selected readings, both for and against this particular "Wall Street wisdom," I am providing some statistical analysis. The table below, which uses Dr. Robert Shiller's data, shows the monthly statistical data of returns which I will use for the remainder of this missive.

Historically, May is the 3rd worst performing month for stocks on yielding an average return of 0.27% and a median return of 0.49%. The chart below graphically depicts the disparity of monthly average and median returns.

May, as shown in the above, also represents the beginning of the "seasonally weak" period for stocks. As the markets roll into the early summer months, May and June tend to be some of weakest months of the year along with September. This is where the old adage of "Sell In May" is derived from. Of course, while not every summer period has been a dud, history does show that being invested during summer months is a "hit or miss" bet at best as shown in the next chart of historical returns for May back to 1900. While May's monthly average is skewed by sharp deviations in returns during the "Great Depression," more recent years have been primarily contained, with only a couple of exceptions, within a +/- 5% return band as shown below.

While there are some years that have posted sizable gains during the summer months, such years do not invalidate the long term statistical probabilities. As the table shows above, the average annual return from the summer months is significantly poorer than the fall and winter. To show the impact of that performance differential, I constructed the following chart which shows the growth of $10,000 invested in each of the seasonal periods.

So, with this context in place let us ponder some different views about whether you should "Sell In May," or not.

"The Dow has closed at a 52-week high on the last day of April seven other times in its history. The next three months showed positive returns two times, negative returns five times, with an overall average return of -1.6%. At its best point during the next three months, it gained a median +1.9%, while at its worst point, it lost a median -3.3%. The years were 1945, 1951, 1954, 1965, 1983, 1995 and 2011."

"But more important at this point is capital preservation and eventually re-establishing some exposure for the year-end rally, which may turn out to be the last leg of this bull market," Maierhofer said in an email. "There are some bearish divergences indicative of a slowing trend but not the kind of divergences usually seen right before major market tops."

"However, and some sectors historically have not adhered to the same seasonal pattern. That’s according to an academic study titled 'The Halloween Effect in U.S. Sectors,' written by Ben Jacobsen, a finance professor at Massey University in New Zealand, and Nuttawat Visaltanachoti, a senior lecturer in finance at that institution.

The industry groupings that stood out the most in their study were food and agriculture, leisure, multimedia, retailing and utilities.

One option would be to invest in ETFs benchmarked to those five. But another would be to focus on stocks within the sectors that are particularly compelling."

As FBN's JC O'Hara explains, the “Sell in May” slogan heard around Wall Street has some truth behind it. The gist of the saying suggests it’s better to be out of the market come May and re-enter during the fall months.

"We ran the numbers over the last 20 years and found validity to the statement. We created a model that went long the market Jan, Feb, March, April, Oct, Nov & Dec. as well as a second model that went long the market May through Sept 30. We concluded that the May – Sept time period model, on average over the past 20 years, would have lost you money.

The majority of the time the market was unimpressive over those summer months. The majority of the markets returns were housed in the first model that was long the months into May and the months after Sept. While there were instances where May – Sept was negative, the risk adjusted returns suggests investors do not necessarily need to exit the market but should expect flat markets with little if any of the yearly gains coming during this time period. The real money was made during other 7 months of the year. As we approach May we are not in the SELL camp yet, but rather acknowledge the fact that a volatile, stagnant, sideways moving market is what history implies. Over the next few pages of this report we examine the past 20 years and highlight where the majority of returns are found."

The key chart in this analysis was the following which shows the seasonal tendency of market returns during "mid-term election years."